Restricting Cartels

As the 20th century dawned, Queen Victoria was in her 63rd year on the British throne. However, world affairs since Her Majesty assumed the throne in 1837 had definitely acquired a more ominous hue and one that scarcely augured well for the future of international cooperation between the Great Powers. Of all the forces that colluded to vitiate even the sincerest of efforts to assuage the overwhelming aura of mutual suspicion and hostility, none was, perhaps, so potent as that of economic rivalry between the different European nations. All the leading Powers— Great Britain, France, Germany, Russia and the United States— were fiercely protectionist. While the presidency of the Republican William McKinley (1897-1901) saw the introduction of the highest ever tariffs in American history (till the 1960s, at least)[1], Germany’s global trade on the other hand, which was ‘swiftly increasing in volume and importance and being assisted by the government as if it were an offensive operation of war, carried the German flag into every port. Nothing was left to chance. The state ran the railways, protected the home market, subsidised the exports and the ships which carried them’.[2] No such paternalistic government could allow the unfettered development of a free market, wherein all manner of competition could abound, without sanctioning its own downfall in the process, for an ideally free market would lead to consumer exploitation and, consequently, popular disillusionment with the government of the day for not keeping a check on the unbridled inflation being perpetuated by rapacious undertakings. Accordingly, the need to protect and perpetuate their economic interests (i.e. imperialism) perforce obliged the Great Powers to forge various political and military alliances, but these, instead of ameliorating the situation, served to only exacerbate it even further, to the point of where all these insidious passions eventually culminated in the Great War of 1914-18.

After 1945, when the Second World War (1939-45) had also ended, a belated realisation dawned on these champions of freedom that irrational protectionism inevitably leads to only fierce internecine strife and conflict. Thus, the panacea, it was supposed, could only lie in the very obverse thereof, namely, a free market. A free market is simply a market structure that is driven by the forces of demand and supply, which, in the stead of seemingly altruistic governments or oligopolies, determine the market price of each commodity. Although the concept of perfect competition, such that must exist in the ideal free market, is a Utopian aspiration, workable competition on the other hand may, and has been, created in the developed western markets. Jesse William Markham, an American economist and anti-trust expert has succinctly explained it in the following words:

“An industry may be judged to be workably competitive when, after the structural characteristics of its market and the dynamic forces that shape them have been thoroughly examined, there is no clearly indicated change than can be effected through public policy measures that would result in greater social gains than social losses.”

Ineluctably, the question which such an exposition of workable competition must necessarily give rise to is why should nations, which were formerly its bitterest opponents, now profess to be the most ardent champions thereof? To learn the answer, it would help to adopt a realistic, i.e. cynical, approach to the matter. To put it bluntly, profits (the difference between the market price and the cost of production) constitute the raison d’être of all firms in the world, for why else would anyone ever wish to create one? Naturally, then, since profits are quantified, quantification is in numbers and numbers are infinite, the typical firm, unless it should have taken leave of its senses, will invariably strive to approximate to the fanciful ideal of infinite profits. Once you understand this reality, then it requires no great stretch of the imagination to envisage the kind of practices in which business firms would feel inclined to engage— e.g. predatory pricing, selective discounts, output restrictions, etc. Given the nature of all such activities, it becomes immediately obvious that because all such machinations essentially endeavour to bring about as perfect an eradication of competition as is humanly possible, then the more firms you successfully manage to drive out of business, the better. That is because when a firm has no competitor in the market, it is deprived of any incentive to improve on its prevailing standards of allocative and productive efficiency (i.e. the production of what is most desired by consumers at the least possible cost).

The United States, which pioneered the creation of the free market, commenced the development of their competition/anti-trust law back in 1890, when Congress passed the memorable Sherman Act. The underlying idea was to promote competition, in the ardent hope that doing so would press producers to satisfy consumer needs by honing their efficiency (both productive and allocative, as mentioned earlier). Rivalry between producers allows consumers to bid for goods and services, thereby creating a fair trade-off between consumers’ needs and society’s opportunity costs.

Section 1 of the Act penalises any agreement between businesses that is made with a view to promoting restraint of trade and limited competition, whereas section 2 is designed to arrest the birth of monopolies. The development was rapid— in 1914, the ClaytonAct further elaborated on the niceties of anti-competitive behaviour and introduced a general proscription of mergers as well. Two independent institutions, the Department of Justice and the Federal Trade Commission, were entrusted with the responsibility of ensuring the implementation of all these legal strictures. As a result of such palpable legislative assiduity, these legislative instruments had a great impact on the market, especially by creating formidable hurdles in the way of establishing cartels to realise anti-competitive aims. This way, the law not only furthered consumer welfare, but also engendered healthy competition between firms, resulting in improved production methods, technological advancements and, overall, a more stable economy.

Across the Atlantic, Europe was not tardy in following suit either, for soon after the end of the Second World War, European statesmen realised the urgent need to pool in their economic resources, particularly coal and iron (the two commodities over which the rivalry between France and Germany had contributed greatly to the outbreak of both World Wars), and create a common market for mutual benefit (and as an alternative inspiration to what was the vision of the mighty Soviet Union). The need for a codified competition law at a supranational forum was, therefore, imperative. Articles 101-109 of the Treaty on the Functioning of the European Union (TFEU) furnish us with just that. The wording of these articles is very similar to those enshrined in the Sherman and Clayton Acts. Article 101, for instance, prohibits, inter alia, agreements and collusions that aim to restrict, prevent or distort competition in the market, whereas Article 102 punishes any abuse by a dominant undertaking of its dominance in the relevant market. The Court of Justice of the European Union (CJEU) has also stated the follwing in this regard:

“The protection of competition is not an aim in itself. As a means of both enhancing consumer welfare, and of ensuring an efficient allocation of resources, competition helps to prevent other welfare-reducing effects. Society as a whole, including consumers, in this way benefits from competition.”[3]

The European Commission is primarily responsible for enforcing competition law in the whole Union, but after the coming into force of Council Regulation 1/2003, National Competition Authorities with devolved powers have been instituted in each Member State to scrutinise the conduct of firms operating there. The enforcement and implementation have been strict and it is because of such strictness that competition in the market has greatly burgeoned.

Pakistan has also recently enacted certain laws for the promotion of competition in the country. The Competition Act 2010 stipulates the promotion of competition in all spheres of commercial and economic activity, enhancement of economic efficiency and protection of consumers from anti-competitive behaviour as its primary goal. The Act applies to all undertakings in Pakistan, regardless of whether they are in public or private hands, and to all actions or matters that evince the potential to affect competition in Pakistan. The Act also created the Competition Commission of Pakistan, which is an independent quasi-regulatory and quasi-judicial body and responsible for the enforcement and regulation of competition law at the national level. For further illustration, consider the two most important sections of this Act:

Abuse of Dominant Position:Section 3 of the Act prohibits the abuse of a dominant position through any practice that prevents, restricts, reduces, or distorts competition in the relevant market. These practices include, but are not limited to, reducing production or sales, unreasonable price increases, charging different customers different prices without objective justifications, terms that make the sale of goods or services conditional on the purchase of other goods or services, predatory pricing, refusing to deal and boycotting or excluding any other undertaking from producing, distributing or selling goods, or providing any service.

Prohibited Agreements: Section 4 of the Act prohibits undertakings or associations from entering into any agreement or making any decision in respect of the production, supply, distribution, acquisition or control of goods or the provision of services, which have the object or effect of preventing, restricting, reducing, or distorting competition within the relevant market. Such agreements include, but are not limited to, market sharing and price fixing of any sort, fixing quantities for production, distribution or sale; limiting technical developments; as well as collusive tendering or bidding and the application of dissimilar conditions. The Commission is authorised, however, to issue either individual or block exemptions under sections5-9 of the Act.

Prima facie, the diction employed in both sections is an identical copy of Articles 101 and 102 TFEU that were formulated for the European market structure. One may appreciate that the same economic structure is not to be found in Pakistan, but the Act, nevertheless, has served as an efficacious deterrent to the contemplation of anti-competitive ideas by undertakings. In many business markets here, the market structure is very narrowly defined. This is primarily the result of nationalisation by the Bhutto Government of 1971-1977. Despite some initial welcome, Bhutto’s policies later incurred the vehement disapprobation of many a voice, both national and international, and the nation was not to fully recover from this debacle until Bhutto’s legacy was finally supplanted by the privatisation drive set in motion by Prime Minister Nawaz Sharif in 1990, and finally achieved in 2008 by Prime Minister Shaukat Aziz. Today, most of these industries are held by dominant giants of enterprises. Exempli gratia, the automobile industry in Pakistan has been dominated by three major undertakings, namely, Pakistan Suzuki Motor, Honda Atlas and Indus Motor Companies Limited, the last of which operates as Indus Toyota. The piteous quality of the manufactures produced and marketed by all three companies depicts an urgent need for the rejuvenation of competition in this particular market. Similar conditions are to be found in the air travel industry as well.

However, there is no gainsaying the fact that even with minimal enforcement of a strong legislative instrument, the Competition Act 2010 has achieved a commendable milestone, as is plain for all to see in the telecom industry today. Formerly, the Pakistan Telecom Company Limited (PTCL) existed as a monopoly, with services provided by the company being limited and bereft of any innovation whatsoever. At present, however, with less barriers to entry and new licences being given to many multinational operators, competition in the relevant market has demonstrated radical improvement and this has facilitated the growth of better services in the field of telecommunications.

There is a dire need for the development of jurisprudence in the field of competition law. Although the Competition Act 2010 still retains its youth, this inferiority in age has not hindered it in delivering more than what was achieved by its alleged elders and betters. The Act endows the Competition Commission of Pakistan with all the requisite powers that a body in its position merits, thus enabling it to exude greater antagonism towards those leviathans that constitute the vanguard of all the anti-competitive forces tarnishing the nation’s markets. It is, after all, we, the people, who need a stronger Commission now more than ever.